Switzer on Saturday

Let’s hope this virus doesn’t go viral

Founder and Publisher of the Switzer Report
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Wall Street has taken the Coronavirus more seriously overnight. A couple of hours before the close, the Dow Jones Index was down over 500 points (or close to 1.8%). It has surprised me how relaxed the big players on US stock markets have been this week, with bond prices rising and yields falling, such that the three month to 10-year yield curve actually inverted in the US on Friday!

As I’ve said before, this can be an early sign that a recession could be on the way. Sure, it’s not 100% reliable as a future indicator but it does underline just how significant this could be for individual stocks in travel-related businesses, retail dependent on Asian customers and miners supplying the Chinese industrial sector.

It’s why I asked this week in Switzer Daily whether the Coronavirus could be a black swan event and stock market killer. My best guess is “No” but it is a guess. I can understand why some traders would be cashing out to sit on the sidelines.

One economist I respect (though he can be a little dramatic at times) is Professor Warwick McKibbin at the Australian National University in Canberra. He told the SMH that: “The global cost of the coronavirus could be three or four times that of the 2003 SARS outbreak that sapped the world’s economy by $US40 billion ($59.6 billion).”

He says the “sheer growth in the Chinese economy over the last 17 years means the global health emergency triggered by the coronavirus outbreak has far greater potential to gouge global growth.”

This runs against last week’s prevailing view that China was a more affluent country today, with the average Chinese person having a greater expectation that health scares are more manageable. There is also a belief that Beijing has more resources and more experience in handling a crisis better than 17 years ago. I hope they’re right!

The economic reality of the virus was underlined with Delta and American Airlines joining United in suspending flights between China and the USA. The potential widespread effects on many companies from Caterpillar to Tiffany’s to Qantas and Flight Centre means stocks are going to be in slide mode until the worst of this crisis abates.

The irony is that US companies are reporting better than expected and we should be seeing stocks sneak higher, with more than 70% of the S&P500 companies that have reported so far registering better earnings results. Nearly half of the companies in the Index have so far reported.

Also the US economy is helping stocks, with the Fed saying earlier this week that “the job market remains strong” but that business fixed investment and exports remain weak. Not surprisingly, the Fed chair Jerome Powell said uncertainties remain, including the Coronavirus.

And here’s another irony. On Tuesday, shares in European banks and luxury goods explained gains for major EU stock market indices. There were upbeat earnings from Swedbank and Spain’s Santander, which boosted investor sentiment. Shares in luxury good bellwether, LVMH, rose by 2.7% but this Coronavirus will change that in the short term, at least. The stock is down nearly 6% since Wednesday, when fears about the virus spiked on the back of a World Health Organisation warning.

On the local front, Australian shares surprisingly rebounded on Friday, meaning our market had the  best start to the year in close to a decade, rising around 5%. “Had the index closed marginally higher, it would have been the strongest January increase since 1994,” the AFR noted.

The S&P/ASX 200 closed 0.13% (or 8.8 points) higher on Friday, to finish at 7017.2. A big story was Link Group, which revealed a debt and cash funded deal at an upfront price of €165 million ($266 million) to buy Pepper Group’s European loan servicing, advisory and asset management business. This took the company’s shares 9.7% higher to $6.81 on the news. This made us at the Switzer Report happy as we had backed LNK as an improver, once a Brexit deal was done.

Afterpay (up 2%) hit a record high this week at $38.56. WiseTech Global rose 2.8% to $24.98. Altium also had a nice 1.9% lift to $39.89. The WAAAX stocks have regained their market darling status, though the Coronavirus is bound to hurt their stock prices this week.

CBA shares hit a 52-week high of $85.97 and have finished higher on five of the past seven trading days. This is another of our core companies that we have recommended over the past year and the bank’s CEO Matt Comyn has done some good navigation of the bank since the Hayne Royal Commission took CBA’s share price down to a low of $69 in mid-2018. That’s a 23% gain and makes the case for buying quality companies when the market goes crazy!

What I liked

  • Annual housing credit grew by 3.1%, up from 3% – the first increase in 2½ years.
  • Sydney’s Inner West had the lowest jobless rate in the nation in the year to December 2019, averaging 2.1% over the calendar year.
  • The Consumer Price Index – the main measure of inflation in Australia – rose by 0.7% in the December quarter, slightly above expectations. In seasonally adjusted terms, the CPI rose by 0.6%. The annual rate of headline inflation lifted from 1.7% to 1.8%. The Aussie dollar rose slightly against the greenback in response.
  • US economic data on Tuesday was pretty good: durable goods orders rose by 2.4% in December (forecast +0.4%). The S&P/CaseShiller 20-city home price series rose by 0.1% in November to be up 2.6% on the year (forecast +2.4%). Consumer confidence rose from 128.2 to a near record high of 131.6 in January (forecast 128). The Richmond Federal Reserve manufacturing index rose from -5 points to +20 points in January (forecast +5 points).
  • The US economy grew at a 2.1% annual pace in the December quarter, in line with forecasts.
  • The US Federal Reserve left its target federal funds rate at 1.5-1.75%, as expected.
  • China’s ‘official’ manufacturing purchasing managers index fell by 0.2 points to 50 points in January. The services gauge rose by 0.6 points to 54.1 points in January. Any reading above 50 indicates an expansion in activity.

What I didn’t like

  • The “final demand” component of producer prices (business inflation) rose by 0.3% in the December quarter to stand 1.4% higher than a year ago – the weakest annual growth rate in 2½ years. Real estate services costs fell by 4.2% – the biggest annual decline in a decade.
  • The NAB business confidence index fell from a reading of zero in November to near 6½-year lows of -1.9 points in December. The long-term average is +5.8 points. And the business conditions index fell from +4.3 points in November to +2.7 points in December. The long-term average is +5.7 points.
  • Private sector credit (effectively outstanding loans) rose by 0.2% in December, after also lifting 0.2% in November. Annual credit growth was unchanged at 9½-year lows of 2.4%.

Is the Coronavirus a buying opportunity?

This is the question I’m getting and I will deal with this on Monday in the Switzer Report. Suffice to say, the fact I get questions like this tells you that at times what I do is damn hard work, but I guess someone has to do it! I’ve had a great run since March 2009. I hope my luck doesn’t get infected by this damn Coronavirus. For the sake of our money and the poor families affected by the tragedy, we have to pray that this virus doesn’t go viral worldwide.

Register now for our first webinar of 2020, where Paul and I will be joined by Rudi Filapek-Vandyck to discuss the stars of reporting season.

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Australia
Monday February 3 – Manufacturing activity gauges (January)
Monday February 3 – CoreLogic home value index (January)
Monday February 3 – Building approvals (December)
Monday February 3 – ANZ Job advertisements (January)
Tuesday February 4 – Reserve Bank Board meeting
Wednesday February 5 – New vehicle sales (January)
Wednesday February 5 – Reserve Bank Governor speech
Thursday February 6 – International trade (December)
Thursday February 6 – Retail trade (December)
Friday February 7 – Statement on Monetary Policy

Overseas
Monday February 3 – China Caixin manufacturing (January)
Monday February 3 – China Industrial profits (December)
Monday February 3 – US ISM manufacturing index (January)
Monday February 3 – US Construction spending (December)
Tuesday February 4 – US Factory orders (December)
Tuesday February 4 – 2020 State of the Union
Wednesday February 5 – US ADP employment change (January)
Wednesday February 5 – US International trade balance (December)
Wednesday February 5 – US ISM Non-manufacturing index (Jan.)
Friday February 7 – China international trade (January)
Friday February 7 – US Non-farm payrolls (January)

Food for thought:

“If you would be wealthy, think of saving as well as getting.” – Benjamin Franklin

Stocks shorted:

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Chart of the week:

The Reserve Bank will meet for the first time this year on Tuesday. While noting that no change to the current interest rate of 0.75% is expected, CommSec published a chart tracking rates over the last sixty years:

Top 5 most clicked:

Recent Switzer Reports:

Thursday 30 January: US kicks off 2020 well

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.